Year to date, the shares of Enquest, Afren and Ophir have declined 75%, 79% and 64% respectively. These declines have only accelerated during the past few weeks. In fact, these declines have wiped out five years’ worth of gains at Enquest and Afren. Since coming to market during July 2011, Ophir’s shares have crashed by 52%.
With share prices and valuations sinking like a stone, it seems as if investors have given up all hope for these oil minnows. But are they likely to disappear completely? Are Enquest, Afren and Ophir now at risk of going out of business and wiping out shareholders?
High cost production
The North Sea is one of the most costly regions in the world to produce oil nowadays. In fact, many international oil companies are now pulling out of the region, in search of more lucrative opportunities elsewhere.
With the price of oil collapsing, high production costs are bad news for Enquest. According to City analysts, the company’s Kraken heavy oilfield in the North Sea has a projected break even cost of $73 per barrel. As Brent is currently trading at around $60/bbl, it’s reasonable to assume that Enquest could be looking at a loss of around $13 for every barrel of oil produced from the Kraken field at current prices. That’s enough to postpone the development of the project.
To reduce risk, Enquest usually hedges its production. But some analysts have speculated that the company has delayed its hedging program this year, leaving it exposed to slumping oil prices.
Still, the company received a boost from the Chancellor’s announcement that he was extending the ring fence on tax losses from six to ten years for North Sea producers. Enquest has tax losses of around $1.5bn to carry forward.
Additionally, Enquest’s management has aggressively boosting their personal holdings of company stock over the past few weeks, which is a positive sign. In particular, since October, management has spent £1.5m on Enquest stock, around 2.1m shares, a huge vote of confidence in the company’s outlook. For this reason alone, there seems to be no reason to suggest that Enquest is at risk of going bust anytime soon.
Meanwhile, Afren is still reeling from the departure of its CEO, COO and weak third-quarter production. The oil group reported a 35% fall in average net production for the nine months to September 30, revenues declined from $1.2bn to $800m and pre-tax profit slumped 61%.
Now, the company faces a period of uncertainty. Afren needs a new management team and strategy as soon as possible, but until then the company’s future is uncertain.
Nevertheless, the company does have some attractive assets and many analysts now believe that the company is an acquisition target for larger peers. So if all else fails, Afren could be taken over.
Lastly, oil explorer Ophir is currently in the process of buying up Salamander Energy, an oil producer with a portfolio of attractive assets, which will complement Ophir’s existing asset base nicely. Salamander shareholders will receive 0.5719 of an Ophir share for each Salamander share. The all-share merger means that Ophir is not spending its coveted cash balance on acquiring Salamander.
For this reason, Ophir is unlikely to go out of business any time soon. At the end of June the company had $1.5bn in cash, enough to ride out any oil market volatility. The acquisition of Salamander should lead to increased cash generation.
The bottom line
All in all, neither Enquest nor Ophir look like they’ll be going bust anytime soon. However, I think that Afren’s future is uncertain, the company lacks direction and until a new management team is in place, the group will struggle to return to growth.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Afren. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.